Tax refunds are always a hot topic this time of year. Some Americans get nothing back at tax time, but millions of others count on that yearly refund to put a little more spending dough in their pockets.
If you’re expecting a refund, put that extra cash to good use. Following are some ideas for using your refund to make you richer.
1. Pay down debt
Using your refund to reduce high-interest balances cuts down on both interest charges and the overall amount you owe.
It also may improve your credit score by lowering your credit utilization ratio, as we explain in “7 Ways to Boost Your Credit Score Fast.” A better score can mean easier access to credit at better rates — something that definitely can make you richer.
Look at it this way: Paying down a credit card charging 18% interest is like earning 18% of the amount you’ve cleared, risk-free and tax-free. There aren’t many investments that offer returns like that.
2. Create an emergency fund
Living paycheck to paycheck often means there’s never enough cash to get ahead. Use your refund to build a financial cushion of savings, ideally enough to cover at least three months of living expenses.
The advantages to doing so include:
- Bills always get paid on time, saving you late fees.
- You never need a cash advance, saving on the fees and high rates of interest those charge.
- You can stock up on bargains at the grocery store, enabling you to always get the best price.
And the peace of mind? Priceless.
For tips on creating an emergency fund, check out “9 Tips for Starting an Emergency Fund Today.”
3. Save on insurance
Many car insurance companies offer a discount if you pay the six- or 12-month premium in full. Use a chunk of your refund to do that, and put the rest in high-yield savings account so you can raise the deductible on your policy — a simple way to save 10% to 20% on your premium.
For more tips on cutting car insurance costs, check out “How to Get the Best Possible Deal on Car Insurance.”
4. Take a class
Use the money from your tax refund to pay for classes that will teach you a skill you’ve always wanted to learn.
Taking classes to boost your skills might be good leverage for a raise at work. Or, you could begin training for a new — and more lucrative — career.
You could start funding a 529 college savings plan or open an individual retirement account for yourself with a tax refund. If you invest your refund wisely every year for a decade or two, you could save up a bundle.
Think your refund isn’t big enough to bother investing? See “How to Get Started Investing With $500 or Less.”
6. Buy Treasurys
Interest rates at levels we haven’t seen in years — that continue to rise — present opportunities for people with money to spare. One of the ways we discuss in “10 Best Moves for Rising Interest Rates” is buying Treasury securities. These can be purchased from an investment broker or directly from TreasuryDirect.gov.
They’re about as safe a return as you can get, there’s almost no limit to how much you can buy, and if you live in a state with income tax, you benefit even more — because there’s no state income tax on Treasurys, unlike with certificates of deposit.
7. Start a business
Use your refund as seed money for a side business. You could:
- Launch a website.
- Sell your own arts and crafts.
- Start a garden and sell your extra fruits and veggies at a farmers market.